Now may be the ideal time to prepare your business for a sale, even if market conditions or internal circumstances don’t yet seem aligned.
Doing the groundwork early opens up more strategic options, positions you to act quickly when an opportunity arises, and helps you secure the maximum return for your business.
Below are some important areas to focus on as you get your company’s affairs in order:
1. Financial Records and Compliance
If your company has maintained meticulous records and a compliance history, you have a great head start. Make sure those records are in a form suitable for due diligence requests from prospective buyers. If recordkeeping has been inconsistent, prioritize remedying this deficiency now. Engage professionals to organize financial and operational data so it can be presented clearly and credibly. Financial statements should be timely completed and, ideally, audited, as buyers and their lenders frequently require audited statements. In fact, a minimum of three years of audited financials is often expected in due diligence.
2. Performance and Projections
As part of its diligence, a buyer will want to review and test your business plans and projections. The projections should be reasonable, and your company should be ready to defend the assumptions baked into those projections.
To optimize business results, consider ways to implement operational efficiencies, increase productivity, and improve profitability.
If your company is experiencing financial distress or other material losses, be prepared to explain the cause(s) and articulate actionable plans for a turnaround, if possible. You should also determine whether the company has an adequate cash runway to get through a sale process; if not, consider financing to bridge the period from due diligence to sale closing.
Develop a realistic valuation for the business. A professional valuation consultant can provide an unbiased estimate based on industry, growth potential, comparable sales, and other factors. Depending on the size and complexity of the business, it may be worthwhile to hire an investment banker to support the valuation and then market the business at the appropriate time. Knowing the range of what the business is worth will keep expectations in check and protect against accepting a low offer.
A valuation will typically be based on a multiple of the last 12 months’ earnings before interest, taxes, depreciation, and amortization (EBITDA). Traditional EBITDA will be adjusted to normalize income/expenses and remove one-time/non-recurring items to provide a better estimate of expected EBITDA. Looking ahead to the due diligence process, potential cost synergies may be added and a working capital benchmark established.
3. Workforce and Employee Matters
Take a fresh look at your workforce and employee benefits. Consider whether staffing levels are adequate, cost-effective, and efficient. Determine which employees are key to the value of the business and a possible transition to a buyer. Assess whether there are beneficial or burdensome employment contracts that would affect the attractiveness of an acquisition opportunity. Identify any unfunded pension benefits or other employee benefits with minimum funding requirements that could become impediments to a deal. Address classification, wage and hour, or benefit compliance issues that could otherwise derail diligence. With adequate lead time, there may be an opportunity to enter into new agreements, negotiate amendments to existing agreements, and/or implement retention or incentive plans to retain talent.
4. Commercial Contracts
Review your commercial contracts or engage counsel to do so. The terms of these contracts may affect the business’s value and a buyer’s willingness to accept an assignment of the contracts (if available) and assume the associated liabilities. Look for provisions relating to the remaining duration of the contract, including renewal options; the ability to assign the contract to a third-party buyer with or without the contract counterparty’s consent; the right to unilaterally terminate the contract with or without notice or penalty; and any covenants that may restrict the company’s ability to transfer its assets or equity interests.
5. Licenses, Permits, and Regulatory Approvals
If your business operates pursuant to licenses, permits, or contracts with governmental authorities, map out the regulatory approvals that would be needed to consummate a change of control, and the estimated time to obtain those approvals. This information may influence a buyer’s assessment of the company’s readiness on the one hand, and may also influence your determination of which buyer may be better positioned to consummate a transaction on the other hand (e.g., if a buyer already holds a license to operate a business in the same industry in the same geography, or has already been vetted by the regulatory body). The applicable time periods needed for regulatory approvals and transfers of licenses should be understood during due diligence and worked into the sale process and closing timeline.
6. Corporate and Tax Structure
Consider your corporate structure and tax treatment. The way your company is structured, whether as a corporation, S corporation, or limited liability company, will affect how sale proceeds are taxed. Certain tax benefits are only available if your business is structured properly ahead of time. In addition, the form of the transaction has tax consequences. Buyers often prefer asset deals for tax benefits and to avoid legacy liabilities, while sellers usually prefer stock deals for capital gains treatment and to avoid “double tax” in a C-corporation setting. Experienced tax advisors can guide you through these issues and make recommendations designed to achieve your objectives.
7. Litigation, Audits, and Investigations
Pending litigation, investigations, or audits can chill buyer interest or reduce the valuation. Develop a strategy: resolve litigation where feasible, conclude investigations and audits, or build a strong defense if a resolution is not viable. A clean slate heading into due diligence reduces uncertainty discounts buyers may otherwise apply.
Closing Note
The decisions you make and actions you take before initiating a sale process often determine how successful the outcome will be. Preparing early not only protects value but also creates opportunities to improve it. While the topics above highlight some of the more important considerations, every business has unique legal, financial, and tax issues that deserve attention well before buyers are at the table. Engaging experienced legal, tax, and financial professionals early can give you more control over the process, help avoid costly surprises, and ultimately position you to secure the best price and terms for your business and for your personal goals after the sale.
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For additional information about the issues discussed in this Insight, please contact one of the authors:
Wendy G. Marcari, a Member of the Firm and the Managing Member of the New York office of Epstein Becker Green, focuses on mergers and acquisitions in the health care industry and on bankruptcy and corporate reorganizations in health care and a broad range of industries.
Rob Vanderbeek, a Partner at Novo Advisors, has more than 30 years of experience in restructuring, performance improvement, due diligence, litigation, valuation, and forensic matters. He has led many distressed companies through the restructuring and sales processes, both in and out of court.
